Welcome back to the realm of the Cash Kings, where we highlight businesses that generate a healthy dose of free cash flow.
Why is cash flow so important? Because it gives management the opportunity to boost shareholder value through actions such as:
A Fool's guide to free cash
Investing, after all, is about putting money up front today to get more of it in return tomorrow. Here at the Fool, we're firm believers that free cash flow, as opposed to traditional accounting earnings, is the best gauge of a firm's health and profitability (or lack thereof).
So, with these cash flow lessons deeply ingrained in your Foolish subconscious -- or maybe just bookmarked as a "favorites" page -- I'll highlight three more cash-flow rulers of our Motley Fool CAPS kingdom.
Unlike Hovnanian Enterprises (NYSE: HOV ) -- which is a cash-burning company CAPS players overwhelmingly dislike -- these are businesses with free cash flow-to-sales margins of 15% and above (a.k.a. the Cash King Margin) that our community is pretty bullish about.
Sound the trumpets! Here's another trio of Cash Kings from CAPS:
|
Company
|
Cash King Margin (Trailing 12 Months)
|
CAPS
Bulls
|
CAPS
Bears
|
|
Cisco Systems (:CSCO)
|
25.4%
|
4,493
|
209
|
|
Covidien (NYSE:COV)
|
17.2%
|
138
|
4
|
|
Cabot Microelectronics (NASDAQ:CCMP)
|
16.0%
|
15
|
1
|
Sources: Morningstar and Motley Fool CAPS.
As always, do not consider these stocks formal picks, but rather suggestions worth further investigation. Due diligence is a Fool's way to riches.
But just for starters, here's a quick summary of these cash-throwing kings, and what some of their loyal CAPS followers say about them.
The Cisco king
With an impressive free cash flow-to-sales margin of more than 25%, behemoth Cisco Systems takes the honors as this week's most prolific Cash King.
As the world's undisputed leader in networking solutions, Cisco has the dominant routing and switching market share -- over competitors like Juniper Networks, Alcatel-Lucent (NYSE: ALU ) , and Nortel Network (NYSE: NT ) -- as well as a Fort Knox-like financial position and attractive overseas growth opportunities to keep its war chest stuffed with cash.
CAPS All-Star TMFBreakerJava thinks there might be a buying opportunity on our hands. He wrote this just a few days ago:
The tech wreck is finally well and truly over. Global growth has overtaken the 2001 bubble aftermath and the large cap titans of that time are back in form. CSCO reported great earnings last night (November 7) and nevertheless looks to slip here in the current ugly market. This is a chance to jump on the rocket at a discount. All aboard.
Coveting Covidien
The next cash flow monarch on our list is Covidien, the diversified health-care powerhouse spun off from scandal-ridden Tyco International (NYSE: TYC ) back in June.
Covidien has always been regarded as Tyco's underappreciated piece, but now that it's unfettered, management is actively seeking to maximize value. Covidien's massive infrastructure, well-regarded name, and leading position in various medical device areas, should do their part to keep the cash gushing.
CAPS player smithscott14 advises patience:
Although I don't expect the stock to do much soon, it should still be a good long-term pick. The company will be divesting some non-core businesses and reinvigorating its R&D to spur sales growth. It could take time for all this to play itself out, but now is a good time to start accumulating shares, as I think the investor has a good margin of safety at these levels.
The polishing pontiff
Our last free cash flow ruler this week is Cabot Microelectronics, the world's leading supplier of polishing pads used in the production of semiconductors.
Though the stock is still relatively undiscovered in CAPS, some of Cabot's bullish ratios deserve mentioning. Analysts expect earnings to grow at a 20% clip for each of the next five years, while its balance sheet remains rock solid ($212 million in cash and investments and no debt). With a PEG of 0.99, this Cash King might be worth following for a while.
CAPS player Netscribe polishes it off:
As pad development and customer acceptance are progressing, [Cabot] is strategically focusing on [the] polishing pad segment, which offers higher margins. With the company looking for investments in demand driven Taiwan and other Asian markets, a positive operating environment is well anticipated for the company.
The Foolish bottom line
Free cash flow-generating companies like Cisco Systems, Covidien, and Cabot Microelectronics are always among my top candidates to research further. Our Motley Fool CAPS intelligence database is a great place to look for your own Cash Kings or read how your fellow Fools feel about thousands of stocks.
Click here to join the forward-thinking CAPS community free of charge.
Be sure to join us next time when I'll feature three more Cash Kings. Until then, may your cash flow reign supreme.
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